Ethan Allen Interiors Inc. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended December 31, 2011; comparison is with the corresponding 2010 periods. The unaudited filing was signed February 2, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $183.3 | $173.3 | $368.2 | $338.2 |
| Gross profit / margin | $98.2 / 53.6% | $89.9 / 51.8% | $196.1 / 53.3% | $172.2 / 50.9% |
| Operating income / margin | $13.9 / 7.6% | $10.5 / 6.0% | $27.6 / 7.5% | $15.9 / 4.7% |
| Net income | $8.1 | $14.7 | $14.8 | $18.6 |
| Diluted EPS | $0.28 | $0.51 | $0.51 | $0.64 |
For the six-month period, operating cash flow was $11.0 million, versus $2.8 million a year earlier. Capital expenditures were $11.4 million, making operating cash flow less capital expenditures approximately negative $0.4 million. Cash and cash equivalents were $66.4 million at December 31, down from $78.5 million at June 30; marketable securities were $11.0 million and restricted cash and investments were $15.4 million. Working capital was $117.1 million and the current ratio was 1.90, compared with $113.9 million and 1.74 at June 30.
Long-term debt was $152.9 million, all under 5.375% Senior Notes due 2015, down from total debt of $165.0 million at June 30. The company had no revolving borrowings and reported $49.3 million available under its $50 million asset-based facility. It was in compliance with debt covenants. Total assets were $602.4 million and shareholders’ equity was $290.4 million at December 31.
Changes and operating trends
- Quarterly sales grew 5.7%; six-month sales grew 8.9%. Wholesale sales increased 5.8% for the quarter and 7.0% for six months; company-operated retail sales increased 9.2% and 12.8%, respectively.
- Gross margin improved in both periods. Management attributed this to sales growth, improved manufacturing efficiency, net improved pricing, and a higher retail sales mix.
- Six-month operating income rose 73.9% to $27.6 million. Wholesale operating income increased to $31.4 million from $21.8 million; retail continued to report an operating loss, but it narrowed to $4.0 million from $5.5 million.
- Net income and EPS declined despite higher sales and operating income, primarily reflecting the change from a prior-year tax benefit to current-year tax expense. Prior-year tax results benefited from use of deferred tax assets; prior-period miscellaneous income also included a $1.5 million out-of-period adjustment.
- Debt fell by $12.1 million during the six months. Financing cash outflow was $16.7 million, including debt payments of $12.1 million and cash dividends of $4.0 million.
Outlook, risks and unusual items
Management reported year-over-year sales growth in both segments for eight consecutive quarters, six consecutive profitable quarters, and increased written orders and backlogs. It remained “cautiously optimistic,” citing new product launches and continued retail-network repositioning, but gave no quantified earnings or sales guidance. Management expected cash from operations to fund anticipated capital expenditures and believed available liquidity would cover debt service, capital expenditures, working capital, and other cash needs. It said the quarterly dividend was expected to continue as economic conditions and liquidity permit.
Risks highlighted include uncertain consumer demand and housing conditions, European sovereign-debt concerns and market volatility, competition and pricing pressure, and potential increases in raw-material, labor, freight, fuel, occupancy, and advertising costs. The company also cited possible production difficulties as it increases capacity and improves custom case-goods efficiency. It manufactures or assembles approximately 70% of products domestically while also sourcing overseas.
The company maintained a $23.9 million valuation allowance against deferred tax assets amid a three-year cumulative loss and noted ongoing U.S. and Canadian tax audits; resolutions may affect the effective tax rate. Environmental matters were described as adequately reserved, with anticipated environmental-control capital expenditures not material. Product warranty liability was $0.8 million. Under its consumer-credit program, the maximum potential future payment obligation was described as indeterminable; the agreement permits collateral demands of up to $12 million under specified conditions, with $6 million held in a restricted collateral account. A Florida design-center joint venture began operations in October, with Ethan Allen holding a 75% interest and contributing $0.8 million.
Key facts for investors to verify
- Whether growth in written orders and backlogs converts into shipments and sustained sales, particularly given promotional-event timing and uncertain consumer demand.
- Whether gross-margin improvement and wholesale profitability persist, and whether the retail segment can move from operating losses to profitability.
- The drivers of the lower year-over-year net income, including the tax valuation allowance, tax audits, and prior-year tax and non-operating income items.
- Liquidity after debt repayments, dividends, and elevated capital expenditures; confirm the availability terms and covenant conditions of the revolving facility.
- Potential exposure under the independent-retailer consumer-credit guarantee and any required collateral, as well as developments in tax, environmental, and warranty matters.